Tech M&A: Report Finds Most Startups Didn’t Raise Outside Cash

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Investors have been in a rush to finance early stage companies in the past few years, leading to angst among startup founders confronting a tougher time making it to the next stage of investment.

But for companies that get successfully acquired, it turns out that outside financing isn’t a necessity. In fact, it’s a rarity.

That’s the conclusion from CB Insights, a research firm that tracks venture capital and private equity investments nationwide. In a new report on private tech company mergers and acquisitions, CB’s analysts found that a huge majority of companies that were purchased in 2012 hadn’t raised any outside funding.

And it wasn’t even close: Of the 2,277 private companies acquisitions that CB Insights tracked last year, the firm found that 76 percent “had not raised investment prior to acquisition.”

“While there were no bootstrapped billion-dollar exits, it is clear that there are a lot of tech companies being formed who are able to grow the old-fashioned way—out of profits or using traditional financing sources like banks,” the report says.

What’s behind that trend? It’s not clear, CB Insights CEO Anand Sanwal says, but some early theories are that startups selling to enterprise or even medium-sized businesses are financing their operations with revenue. Other companies may have started as consulting businesses, which provided money to underwrite product development.

I’d also throw in the rise of the “acqui-hire,” where a bigger company buys a small one for its engineering talent—sometimes before the startup has done much of anything on its own. But these are all basically theories at the moment.

“To be honest, [it’s] something we were surprised by and that we plan to dig into a bit more,” Sanwal says.

With the window for public stock offerings still not a viable way to cash out private companies, most investors backing startups are left with the M&A market as a way to get returns on their money.

It’s hard to put clear numbers on the financial outcomes of most M&A deals in the sector, because the prices aren’t often disclosed—only 331 of the deals CB Insights tracked had a known pricetag, for a total of $46.8 billion.

Big, eye-popping deals like Facebook’s $1 billion (at the time) cash-and-stock deal for Instagram take most of the attention, but they’re rare. CB Insights found that more than 50 percent of private tech M&A deals are for less than $50 million, and 80 percent were for deals less than $200 million.

The median of those disclosed deals would represent a company that raised $16.6 million and was sold for $73.5 million.

The CB Insights research also points out some highlights that won’t be a big surprise to people watching the technology industry headlines over the past year.

Facebook and Google led the top 10 list of private tech company acquirers, with 12 buyouts each. The rest of the list is littered with notable names from older and newer eras in the industry—Cisco, Groupon, Oracle, Twitter—along with a less well-known company, electronic components distributor Avnet.

California was the clear center of M&A activity in the U.S., with 455 of the nearly 2,300 buyouts tracked—more than the next five states combined. New York was the second ranking state, with 138 deals. Texas (91), Massachusetts (87), and Illinois (54) rounded out the top five, with Washington state (50) ranking sixth.